solution

Consider a fictional price index, the College Student Price Index (CSPI), based on a survey of annual purchases of a typical college student. Suppose the following table shows information on the market basket for the CSPI and the prices of each good in 2012, 2013, 2014.

Quantity in Basket 2012 2013 2014
Price ($) Cost of Basket ($) Price ($) Cost of Basket ($) Price ($) Cost of Basket ($)
Notebooks 10 5 50 7 70 11 110
Calculators 1 100 100 110 110 140 140
Large coffees 150 1 150 1 150 1 150
Energy drinks 50 2 100 3 150 1 200
Textbooks 10 100 1,000 120 1,200 150 1,500
Total cost $1,400 $1,680 $2,100
100

The cost of each item in the baseket and the total cost of the basket are shown for 2012. Perform these same calculations for 2013 and 2014, and enter the results in the table.

Suppose the base year for this price index is 2012. Calculate and enter the value of the CSPI for the remaining years in the last row of the table.

Between 2012 and 2013, the CSPI increased by _____. Between 2013 and 2014, the CSPI increased by _____.

Which of the following, if True would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Choose all that apply.

a. As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their smart phones or on their computers.

b. Professors required each student to by 10 notebooks, regardless of the price.

c. Energy drinks became increasingly popular on college campuses between 2012 and 2014 due to significant improvements in flavor.

 
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